Audit Report on the Virgin Islands Lottery, Government of the Virgin Islands

[Audit Report on the Virgin Islands Lottery, Government of the Virgin Islands ]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 01-i-290

Title: Audit Report on the Virgin Islands Lottery, Government of
the Virgin Islands

Date: May 11, 2001

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V-IN-VIS-002-00-M

May 11, 2001

Honorable Charles W. Turnbull
Governor of the Virgin Islands
No. 21 Kongens Gade
Charlotte Amalie, Virgin Islands 00802

Subject: Audit Report on the Virgin Islands Lottery, Government of the Virgin Islands
(No. 01-i-290)

Dear Governor Turnbull:

This report presents the results of our audit of operations of the Virgin Islands
Lottery.

Section 5(a) of the Inspector General Act (5 U.S.C. app. 3) requires the Office of
Inspector General to list this report in its semiannual report to the U.S. Congress. In
addition, the Office of Inspector General provides audit reports to the Congress.

Please provide a response to this report by June 29, 2001. The response should
provide the information requested in Appendix 4 and should be addressed to our
Caribbean Regional Office, Federal Building - Room 207, Charlotte Amalie, Virgin
Islands 00802.

Sincerely,

Roger La Rouche
Assistant Inspector General
for Audits

cc: Mr. Austin Andrews, Acting Director, Virgin Islands Lottery

EXECUTIVE SUMMARY

BACKGROUND
The Virgin Islands Lottery was created in 1937 and established
as an independent instrumentality of the Government of the
Virgin Islands in 1971. The Lottery operates a traditional
biweekly lottery and also sells instant lottery tickets. The
Lottery's revenues totaled $27,793,400 during fiscal years 1998
and 1999, and expenditures during the same 2 years totaled
$28,182,366. The Lottery's unaudited financial statements
showed losses of $120,062 in fiscal year 1998 and $268,904 in
fiscal year 1999.

OBJECTIVE
The objective of the audit was to determine whether the Lottery
(1) had adequate procedures and management controls in place
for the disposition of revenues from ticket sales, the payment of
prizes, and the disposition of unsold lottery tickets and (2)
distributed its revenues in accordance with legal requirements.

RESULTS IN BRIEF
The Lottery's internal controls over the payment of prizes were
adequate. However, Lottery funds totaling $1,211,226 were not
used for authorized purposes ($1,066,387) or properly collected
and deposited to the Lottery's account ($144,839). Specifically,
(1) Lottery funds totaling $99,102 were used by the former
Director for personal purposes; (2) collections totaling $11,930
were not deposited to the Lottery's account and may have been
stolen; (3) a bank deposit totaling $40,985 was not credited to the
Lottery's bank account and also may have been stolen; (4)
accounts receivable totaling $88,224 were not collected from
dealers and agents for unpaid returned checks and for instant
lottery tickets delivered to business establishments; (5) instant
lottery funds totaling $916,000 were transferred to the traditional
lottery without proper authorization; (6) additional funds of
$51,000 were used to fund a celebrity golf tournament and to pay
the cost for 30 students to attend youth games in the United
States; (7) licensing fees totaling $3,700 were not collected from
agents who sell instant lottery tickets; and (8) a total of $285 from
two change funds at the instant lottery could not be accounted for.

We also found that unsold instant lottery tickets valued at about
$97,000 were not appropriately returned to the contractor for
refund and that unsold traditional lottery tickets valued at $14,380
were not accounted for and were unavailable for sale until 1 day
prior to the drawings. As a result, the Lottery lost revenues of
$97,000 from refunds and lost the potential for revenues of
$14,380 because tickets were not available for sale. Further,
because it had operated at a loss, the Lottery, during fiscal years
1998 to 1999, did not transfer any revenues from the traditional
lottery to the General Fund, as required by the Virgin Islands
Code. Consequently, as of September 30, 1999, the Lottery had
reported an accumulated account payable to the Government's
General Fund totaling $3.3 million.

During the audit, we also noted other issues related to the
Lottery's compliance with legal requirements and internal control
procedures. These matters pertained to (1) the number of
members appointed to the Lottery Commission, (2) the issuance
of audited financial statements, (3) the preparation of monthly
activity reports, (4) the maintenance of property control records
and the performance of periodic physical inventories of
equipment, (5) the management of computer operations and the
assurance of Y2K compliance, and (6) the methodology used to
verify daily cash collections.

RECOMMENDATIONS

We made 1 recommendation to the Governor of the Virgin
Islands and 15 recommendations to the Virgin Islands Lottery to
address the possible misuse of Lottery funds and the internal
control weaknesses disclosed by the audit.
AUDITEE COMMENTS
AND OFFICE OF
INSPECTOR GENERAL
EVALUATION

The Governor and the Lottery concurred with the 16
recommendations and indicated that corrective actions had been
or would be taken. Based on the responses, we considered
3 recommendations resolved and implemented and 10
recommendations resolved but not implemented and requested
additional information for the 3 remaining recommendations.

CONTENTS

EXECUTIVE
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

INTRODUCTION
Background . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Objective and Scope. . . . . . . . . . . . . . . . . . . . . . 5
Prior Audit Coverage . . . . . . . . . . . . . . . . . . . . . 6

RESULTS OF AUDIT
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Disposition of Lottery Funds . . . . . . . . . . . . . . . . . 7
Controls Over Unsold Lottery Tickets . . . . . . . . . . . . . 11
Distribution of Lottery Revenues . . . . . . . . . . . . . . . 12
Other Lottery-Related Issues . . . . . . . . . . . . . . . . . 12

RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

APPENDICES
1. Monetary Impact. . . . . . . . . . . . . . . . . . . . . . 20
2. Prior Audit Reports. . . . . . . . . . . . . . . . . . . . 21
3. Responses to Draft Report. . . . . . . . . . . . . . . . . 23
4. Status of Recommendations. . . . . . . . . . . . . . . . . 27

INTRODUCTION

BACKGROUND
The Virgin Islands Lottery was created by statute in 1937 and
established as an independent instrumentality of the Government
of the Virgin Islands in 1971. The Lottery's operations are
managed by a Director, who is subject to the supervision of a
7-member Lottery Commission. The Virgin Islands Code
(32 V.I.C. Chapter 13) specifies the powers and duties of the
Director and the Lottery Commission.

According to the Lottery's Acting Director, the Lottery's mission
is to operate a lottery system in an efficient, fair, and trustworthy
manner, and the Lottery's goals are to improve the efficiency of
lottery operations and to reduce operating expenditures in order
to increase the amount of revenues transferred to the
Government's General Fund.

The Lottery has 44 employees to administer the traditional and
instant lotteries and the licensing of 581 lottery agents and
dealers. The traditional lottery is conducted on a biweekly basis
with 24 regular and 2 special drawings. For each regular
drawing, 32,000 sheets of tickets (25 tickets per sheet) are printed
and sold to dealers for $20 per sheet (or $.80 per ticket). For each
special drawing, 40,000 sheets of tickets (25 tickets per sheet) are
printed and sold to dealers for $40 per sheet (or $1.60 per ticket).
Instant lottery tickets are sold for $1 and $2, and agent and dealer
license fees are $25 per year.

Although revenues of the Virgin Islands Lottery are derived from
the sale of traditional and instant lottery tickets and the licensing
of agents and dealers, the Lottery's financial statements reflected
revenue and expenditure activity only for the traditional lottery.
Revenues totaled $27,793,400 during fiscal years 1998 and 1999,
and expenditures during the same 2 years totaled $28,182,366.
The Lottery's unaudited financial statements showed losses of
$120,062 in fiscal year 1998 and $268,904 in fiscal year 1999.

OBJECTIVE AND
SCOPE
The objective of the audit was to determine whether the Lottery
(1) had adequate procedures and management controls in place
for the disposition of revenues from ticket sales, the payment of
prizes, and the disposition of unsold lottery tickets and (2)
distributed its revenues in accordance with legal requirements.
The scope of the audit included Lottery activities that occurred
during fiscal years 1998 and 1999 and other periods as deemed
appropriate.

To accomplish our audit objective, we reviewed the Lottery's
operating procedures; reports prepared for ticket sales, drawing
activities, and financial statements; receipts prepared for ticket
sales to dealers and agents and for prize payments; and records
for payrolls, expenditures, and equipment. The audit was
conducted from February through September 2000 at the offices
of the traditional and instant lotteries and at business
establishments on St. Thomas and St. Croix where instant lottery
tickets were sold.

Our audit was conducted in accordance with the "Government
Auditing Standards," issued by the Comptroller General of the
United States. Accordingly, we included such tests of records
and other auditing procedures that were considered necessary
under the circumstances. The "Standards" requires that we obtain
sufficient, competent, and relevant evidence to afford a
reasonable basis for our findings and conclusions.

As part of our audit, we evaluated the internal controls at the
Lottery to the extent we considered necessary to accomplish the
audit objective. Internal control weaknesses were identified in
the areas of disposition of lottery funds; disposition of unsold
lottery tickets; distribution of revenues; and compliance with the
laws, rules, and regulations related to the Lottery's operations.
These weaknesses are discussed in the Results of Audit section of
this report. The recommendations, if implemented, should
improve the internal controls in these areas.

PRIOR AUDIT
COVERAGE
The Office of Inspector General has not issued any reports on the
Virgin Islands Lottery during the past 5 years. However, since
1984, the Office of Inspector General and the Virgin Islands
Bureau of Audit and Control have issued a total of three reports
related to the Lottery's operations (see Appendix 2).

RESULTS OF AUDIT

OVERVIEW
The Lottery's internal controls over the payment of prizes were
adequate, but other controls needed improvement. Specifically,
we found that Lottery funds totaling $1,066,387 were used for
questionable purposes; revenues totaling $144,839 were not
realized; unsold lottery tickets valued at $111,380 were not
adequately controlled; and the Lottery had not made legally
required transfers totaling $3.3 million to the Government's
General Fund. These conditions occurred because the Lottery did
not have adequate procedures and management controls in place
for (1) the disposition of revenues from ticket sales and fees from
agent and dealer licenses and (2) the disposition of unsold lottery
tickets. In addition, we concluded that the Lottery did not comply
with certain provisions of the Virgin Islands Code related to the
required transfer of a percentage of revenues to the General Fund,
the required number of Lottery Commission members, the
publication of audited financial statements, and the preparation
and submission of monthly financial reports. Further, the Lottery
did not have adequate controls over equipment, computer
operations, and daily cash collections.

DISPOSITION OF
LOTTERY FUNDS
Lottery funds totaling $1,211,226 were not used for authorized
purposes ($1,066,387) or properly collected and deposited to the
Lottery's account ($144,839). Specifically, we found that (1)
Lottery funds totaling $99,102 were used by the former Director
for personal purposes; (2) collections totaling $11,930 were not
deposited to the Lottery's account and may have been misused;
(3) a bank deposit totaling $40,985 was not credited to the
Lottery's bank account and also may have been misused; (4)
accounts receivable totaling $88,224 were not collected from
dealers and agents for unpaid returned checks and for instant
lottery tickets delivered to business establishments; (5) instant
lottery funds totaling $916,000 were transferred to the traditional
lottery without proper authorization and additional funds of
$51,000 were used for purposes that did not add value to the
operations of the instant lottery; (6) licensing fees totaling $3,700
were not collected from agents who sell instant lottery tickets;
and (7) a total of $285 from two change funds at the instant
lottery could not be accounted for.

Lottery Credit Card Used
for Personal Expenses
Totaling $99,102
In June 1995, the former Director opened a management account
with an investment firm on St. Thomas. The management
account provided the Director and the Assistant Director with
credit cards to make cash withdrawals from automated teller
machines and to make purchases at business establishments
without the authority, knowledge, or consent of the Lottery
Commission or the Government. Our analysis of the
expenditures incurred by the former Director indicated that the
expenditures were primarily of a personal nature and were not
related to the operations of the Lottery. However, we concluded
that expenditures incurred by the Assistant Director were for
Lottery operation purposes.

During the period of June 1995 to March 1999, funds of $161,387
from the traditional and instant lotteries were deposited into the
management account. Our review of the management account
monthly statements, which detailed the transaction date, vendor
name, vendor location, and dollar amount for each credit card
transaction, showed that the former Director used Lottery funds
of at least $99,102 for personal purposes.

Specifically, during the period of July 1995 to January 1999, the
former Director incurred $60,678 in miscellaneous expenditures
for charges at restaurants, hotels, boutiques, sports facilities, and
department and specialty stores and for Internet service and
cellular telephones among other charges; withdrew $34,638 in
cash from various automated teller machines in the Virgin Islands
and the continental United States; incurred $139 for automated
teller machine usage fees; incurred $600 in annual usage fees for
the management account and the credit card; and incurred $3,047
in overdraft fees.

In an October 20, 1998 letter, the Lottery's Special Assistant
informed the former Director that the Virgin Islands Code
(32 V.I.C. Chapter 13) did not contain a provision that authorized
the withdrawal of Lottery funds without adequate supporting
documentation to show the Lottery-related purpose of the
expenditures. In a January 25, 1999 letter, the then Assistant
Director also requested that the former Director "rectify any
disallowed expenditures that are still outstanding." As of
September 30, 2000, the former Director had not repaid any of the
cash withdrawals or personal expenditures.

Cash Collections
Totaling $11,930 Not
Deposited
According to the Lottery's Office Manager, the established
practice regarding collection of unpaid returned checks is to mail
a form letter to dealers and agents requesting payment. The
check number, dealer/agent name, check date, payment date, and
check amount are logged into a journal for each unpaid returned
check. When payment is made, the payment date, payment
amount, and receipt number are written in red in the journal. Our
review showed that during the period of July to November 1998,
on three occasions a dealer made cash payments totaling $11,930
at the Lottery office to satisfy payment for six unpaid returned
checks. Although the dealer was issued receipts for the cash
payments, the payment information was not transcribed into the
journal and the cash was not included in the days' deposits. In
September 1999, the employee who processed these transactions
left her position without officially resigning, and as of
September 30, 2000, no efforts had been made to recoup the
$11,930.

Bank Deposit Totaling
$40,985 Missing
On July 11, 1997, an armored delivery service employee picked
up two bank deposit bags from the Lottery's sales office in
Charlotte Amalie, St. Thomas, for delivery to a local bank.
However, the Lottery's bank account was credited only for the
money contained in one of the bank bags. Accordingly, the other
bank bag, which contained $40,985, was not credited to the
Lottery's bank account, although the records maintained by the
armored delivery service company indicated that a bank
employee received and signed for two bank bags. In a
September 18, 1997 letter, the former Director wrote the bank's
branch manager regarding the unaccounted-for bank bag. In an
October 26, 1997 letter, the bank's branch manager stated that the
bank did not have any record of ever having received the
unaccounted-for bank bag. After the initial letter from the former
Director, no other efforts were made to recoup the missing
$40,985.

Accounts Receivable
Totaling $88,224
Not Collected
On April 6, 1994, the Legislature passed Act No. 5966, which
authorized the Lottery Commission to assess a $25 fee on each
unpaid returned check issued to the Lottery by dealers and agents.
In addition, Act No. 5966 stated, "The Commission shall
establish, within ninety (90) days of the enactment of this Act
[April 6, 1994], a standard policy for dealing with lottery dealers
or sales agents who deliver more than three unpaid returned
checks within a twelve (12) month period." However, we
determined that a standard policy was neither developed nor
distributed to Lottery employees. As a result, cashiers were not
restricted from accepting checks from dealers and agents with
outstanding account balances due for unpaid returned checks. As
of September 30, 1999, 42 lottery dealers had outstanding
account balances totaling $45,659, and as of March 31, 2000,
16 sales agents had outstanding accounts receivable balances
totaling $8,769 as a result of unpaid returned checks. In addition,
we found that as of December 31, 1999, 70 sales agents owed the
Lottery $33,796 for instant lottery tickets delivered to their
business establishments but for which funds had not been
remitted. Therefore, the total amount of uncollected accounts
receivable was about $88,224.
Questionable Transfers
Totaling $916,000
Made From Instant
Lottery

We found that operating expenses of the instant lottery were
initially paid from the operating account of the traditional lottery
and that, to reimburse the operating account of the traditional
lottery, deductions were made from the operating account of the
instant lottery on a quarterly basis. However, five certificates of
deposit totaling about $836,000 were purchased during the period
of February to July 1996 using instant lottery funds. When these
certificates of deposit were canceled by the Lottery during the
period of November 1996 to February 1999, all of the proceeds
were deposited into the operating account of the traditional
lottery. In addition, we found funds totaling $80,000 that had
been transferred from the operating account of the instant lottery
to the operating account of the traditional lottery. Both the
certificates of deposit and the transfer were in excess of the
amount required for reimbursement of the initial expenditures of
the instant lottery. We therefore concluded that instant lottery
funds of $916,000 were used to absorb operating expenditures of
the traditional lottery.
Instant Lottery
Funds Totaling $51,000
Not Used for Instant
Lottery Purposes

We also found that in April 1996 and September 1997, instant
lottery funds of $30,000 were transferred to a management
account for use at the discretion of the Director and the Assistant
Director. Additionally, in August 1997, instant lottery funds of
$21,000 were used to fund the cost for 30 students to attend youth
games in the continental United States and to fund a portion of a
celebrity golf tournament. These expenditures, which totaled
$51,000, did not add value to the operations of the instant lottery.
Lottery Agent License
Fees Totaling $3,700
Not Collected

Although traditional lottery dealers were required to renew their
licenses on an annual basis, no such requirement existed for
agents who sold instant lottery tickets. However, we believe that
the intent of the Lottery was to require renewal of the agent
license on an annual basis because the agent application form was
valid for a period of 1 year, with extensions for successive 1-year
periods. Moreover, during the period of 1994 through 1997,
when the instant lottery was run by a contracted firm, instant
lottery agents were required to renew their licenses on an annual
basis. In 1998, when management of the instant lottery was
transferred from the contracted firm to the Lottery, fees for agent
licenses were not requested or collected by staff at the instant
lottery or the administration at the traditional lottery, although
instant lottery tickets continued to be delivered to the agents'
places of business. During fiscal years 1998 and 1999, 74 agents
sold instant lottery tickets. Based on the annual renewal fee of
$25, we determined that the Lottery did not collect $3,700 in
agent licensing fees over the 2-year period.

CONTROLS OVER
UNSOLD LOTTERY
TICKETS
At least 1,165 packets of unsold instant lottery tickets valued at
about $97,000 were not appropriately returned to the contractor
for refund, and 604 sheets of unsold traditional lottery tickets
valued at $14,380 were not accounted for until 1 day prior to the
drawings. As a result, the Lottery lost revenues of $111,380 from
refunds and potential sales.

Instant Lottery Tickets
Valued at $97,000 Not
Returned for Refund
The contract with the firm that managed the instant lottery from
1994 to 1997 contained a clause which stated that the contractor
would "assume [the] risk of all unsold tickets." Despite this
provision, we found 1,165 packages of instant lottery tickets
valued at about $97,000 that the Lottery did not return to the
contractor for refund. This occurred because the Lottery did not
have adequate control over unsold tickets.

Traditional Lottery
Tickets Valued
at $14,380 Not Available
for Sale
During fiscal years 1998, 1999, and 2000 (through July 31),
604 sheets of unsold tickets valued at $14,380 remained
unaccounted for until 1 day prior to the drawings, although
inventories of tickets should have been conducted on a daily basis
and documented on forms entitled "Daily Inventory of Ticket
Sales." Of the 604 sheets of tickets, 295 sheets valued at $8,000
were unaccounted for at the Sunny Isle, St. Croix, branch;
262 sheets valued at $5,240 had been reprinted for Drawing
No. 25 in September 1998 and were unaccounted for; and
47 sheets valued at $1,140 were not accounted for on St. Thomas
and St. John and at Frederiksted, St. Croix. Because these 604
sheets of tickets were not available for sale, the Lottery lost
potential ticket sales revenue of $14,380.

DISTRIBUTION OF
LOTTERY REVENUES
Although not expressly stated in the Virgin Islands Code, it
appears that the Virgin Islands Lottery was established primarily
for the purpose of providing funds to help support the operations
of the Government of the Virgin Islands. This assumption is
based on 32 V.I.C. 246(a)11(i), which requires the Lottery to
"transfer . . . not less than five percent (5%) of the revenues of the
official lottery . . . to the General Fund of the Treasury of the
United States Virgin Islands." However, because it has operated
at a loss, the Lottery, during fiscal years 1998 to 1999, did not
transfer any revenues from the traditional lottery to the General
Fund. Accordingly, as of September 30, 1999, the Lottery had an
accumulated account payable to the Government's General Fund
totaling $3.2 million. This amount is reported in the Lottery's
unaudited financial statements for the fiscal year ending
September 30, 1999.

Regarding the instant lottery, we found that during fiscal years
1994 to 2000 (through June 30, 2000), the Lottery transferred
$530,372 from the instant lottery to the General Fund. However,
based on our review of quarterly sales reports prepared by the
instant lottery's accountant, we estimated that the contributions
to the General Fund should have been $643,460, or $113,088
more than the amount actually transferred by the Lottery. We
attributed the difference to the Lottery's not always including
instant lottery sales for the entire month when calculating the
required contribution amounts.

In order to improve the ability of the Lottery to generate sufficient
revenues to make required transfers to the Government's General
Fund, the Lottery must reduce expenditures and maximize
collections, as discussed in this report. Additionally, the Lottery
should investigate ways, including new types of lottery games, to
make itself more attractive to potential customers while
improving its profitability.

OTHER
LOTTERY-RELATED
ISSUES
During the audit, we noted certain other matters related to the
Lottery's compliance with legal requirements and internal control
procedures. These matters pertained to (1) the number of
members appointed to the Lottery Commission, (2) the issuance
of audited financial statements, (3) the preparation of monthly
activity reports, (4) the maintenance of property control records
and the performance of periodic physical inventories of
equipment, (5) the management of computer operations and the
assurance of Y2K compliance, and (6) the methodology used to
verify daily cash collections.

Required Number of
Commission Members
Not Appointed
The Virgin Islands Code (32 V.I.C. 244(a)) states:

The Virgin Islands Lottery Commission shall be
composed of the Commissioner of Finance who
shall be the Chairman of the Commission, five
additional members appointed by the Governor,
subject to confirmation by the Legislature, for a
term of four years. Of the five members
appointed by the Governor and confirmed by the
Legislature, two members shall be licensed lottery
sales agents, one from the District of St. Thomas-
St. John and one from the District of St. Croix; of
the remaining three members, one each shall be a
resident of St. Croix, St. Thomas and St. John,
respectively.

We found that since at least 1997, the Governor had not
appointed the "five additional members" required by the Code.
Therefore, since at least 1997, the Lottery Commission has been
inactive, and rules and regulations to add value to the operations
of the Lottery have not been promulgated.

In addition, as of January 1999, the Governor had not appointed
a permanent Lottery Director in accordance with the Virgin
Islands Code (32 V.I.C. 245(a)).

Audited Financial
Statements Not Issued
The Virgin Islands Code (32 V.I.C. 260a) states, "The financial
records of the Commission, as they pertain to Lottery revenues,
shall be subjected to an annual independent audit by a certified
public accountant or firm of certified public accountants to be
designated by the President of the Legislature." However, the
most recent financial statements to be audited were for the fiscal
year ended September 30, 1988. Accordingly, during fiscal years
1989 to 1999, or a period of 11 years, the Lottery had not had an
independent evaluation of its financial statements.

In June 2000, the Lottery's Special Assistant provided us with
unaudited financial statements for fiscal years 1998 and 1999.
Our limited review of these financial statements showed that
much of the information compiled by the Special Assistant could
not be corroborated or was inaccurate. For example, we found
the following:

- Revenues from the "Sales of Tickets" as reported in the
Statement of Revenues and Expenses did not include revenues
from the instant lottery.

- "Cash and Cash Equivalents" as reported in the Balance
Sheet did not include the amounts of existing change funds.

- "Property, Plant and Equipment" as reported on the Balance
Sheet could not be corroborated because the Lottery did not have
an accurate, current, and complete property list. In addition,
accumulated depreciation increased from $127,623 in fiscal year
1998 to $516,124 in fiscal year 1999 without any corresponding
increase in the reported amounts for depreciable assets.
Furthermore, the notes to the financial statements indicated that
the Lottery's assets were depreciated using the straight-line
method.

Monthly Reports Not
Prepared
The Virgin Islands Code (32 V.I.C. Chapter 13 247(i)) states
that the Lottery's Director has the duty "[t]o certify monthly to
the Commissioner of Finance and the Commission a full and
complete statement of lottery revenues, prize disbursements and
other expenses for the preceding month." In addition, the Code
(32 V.I.C. 246(a)(12)(d)) states that the Lottery Commission
has the duty "[t]o report monthly to the Governor and the
Legislature the total lottery revenues, prize disbursements and
other expenses for the preceding month, and to make an annual
report, which shall include a full and complete statement of
lottery revenues, prize disbursements, and other expenses, to the
Governor and the Legislature." Despite these requirements, the
last monthly report prepared by the Lottery was for August 1995.
Because there has been no active Lottery Commission since 1997,
monthly reports also have not been submitted to the Governor and
the Legislature.

Adequate Property
Control Records Not
Maintained
The Lottery did not have an accurate, current, and complete
property list and had no record of ever having conducted a
physical inventory of equipment. We found that the Lottery's
administration unit had a property list prepared in 1997, that the
Lottery's Special Assistant had a list of computer equipment but
the list did not contain the cost or location of the items, and that
the Lottery's accountant maintained paid vouchers for equipment
items purchased since 1997.

We reviewed a sample of 30 equipment items from the three
property record sources maintained by the Lottery. Based on our
review, we located 19 pieces of equipment but were unable to
locate 11 pieces of equipment.

To strengthen internal controls in this area, we believe that the
Lottery should prepare master property records to include, but not
necessarily be limited to, (1) a description of the property; (2) a
serial number; (3) a Lottery property tag number; (4) the name of
the person who has custody of the property; (5) the location, use,
and condition of the property; (6) the acquisition date; (7) the cost
of the property; and (8) any ultimate disposition data, including
date of disposal and sale price of the property. In addition, we
believe that physical inventories should be conducted at least
once every 2 years and that the results of the physical inventories
should be reconciled to the property records.

Computer Operations Not
Adequately Supervised
The Lottery did not have a computer specialist to oversee the data
processing needs of the traditional and instant lotteries.
Regarding the traditional lottery, we found that desktop
computers in the administrative unit were not connected to the
Lottery's mainframe computer, the accounting software did not
contain cash management and payroll modules, and only the prize
payment module had been installed in the ticket sales and prize
payment unit on St. Thomas. In addition, nine desktop computers
on St. Thomas, St. John, and St. Croix were not being used
because operating software had not been appropriately installed.

Regarding the instant lottery, computers had not been upgraded
as of June 30, 2000 to ensure that they were Y2K compliant
because the contract to perform this work had not been approved
by the Department of Justice and the Government's Office of
Information Technology.

To strengthen internal controls in this area, we believe that the
Lottery should hire a computer specialist to assist it in meeting its
data processing needs and that the contract to perform Y2K
upgrades should be finalized and approved.

Procedures To Verify
Daily Collections Not
Adequate
The Lottery's accounting unit reviewed the work of the Lottery's
cashiers to determine whether receipts were appropriately
prepared and whether each day's deposit could be validated by
the receipts. Despite this practice, we found that cash shortages
and overages were not properly reconciled and accounted for.
For example, on June 15, 2000 a cashier sold 25 sheets of special
drawing tickets to a dealer at $40 per sheet, for a total sales price
of $1,000. Although the cashier indicated on the sales receipt that
25 sheets of tickets had been sold, the cashier inadvertently wrote
$100 as the amount collected. In reviewing this transaction, the
accountant recorded the error but incorrectly assumed that there
was a cash overage because the day's deposit was $900 more than
could be validated by the day's sales receipts. Had the situation
involved a cash shortage, the accountant would have established
an account receivable from the cashier in the amount of the
shortage. However, this control procedure did not consider
whether the value of the tickets sold and the amount of lottery
license fees collected each day were equal to the total amount of
funds collected and deposited. We also found that the supervisors
located at the Lottery's branch offices did not conduct detailed
reviews of daily collections and receipt documents to identify and
correct the frequent errors made by the cashiers. Accordingly, we
believe that (1) the control procedures used by the accounting unit
should include a reconciliation of the number of tickets sold to
the amount of cash collected and deposited and, in the case of
cash shortages, the establishment of accounts receivable from
cashiers and (2) branch office supervisors should review and
reconcile the daily collections and receipt documents.
Unauthorized Change
Funds Established

During the period of April 1994 to January 1998, the instant
lottery was managed by a contracted firm. As part of the
contracted firm's operations, change funds were established at
both the St. Thomas and the St. Croix offices. In February 1998,
the lottery assumed the day-to-day operations of the instant
lottery. As part of the transition, the employees who worked for
the contracted firm became employees of the lottery. These
employees continued the use of the change funds but did not
inform lottery officials of the existence of the change funds.

We found that although documentation of authorization was not
provided for the establishment of change funds at the instant
lottery offices on St. Thomas and St. Croix, each office had a
change fund of $300. At the time of our cash counts, the change
fund on St. Thomas had a balance of $17, or $283 less than
required, and the change fund on St. Croix had a balance of $298,
or $2 less than required. The St. Thomas cashier was not aware
of the methodology to account for a change fund. In addition,
Lottery officials were not aware that the change fund for the
St. Thomas office had been depleted.

RECOMMENDATIONS

TO THE GOVERNOR
OF THE VIRGIN
ISLANDS
We recommend that the Governor of the Virgin Islands:

1. Appoint five additional members to the Lottery
Commission in accordance with the Virgin Islands Code
(32 V.I.C. 244(a)) and appoint a permanent Lottery Director,
also in accordance with the Code (32 V.I.C. 245(a)).

TO THE VIRGIN
ISLANDS LOTTERY
We recommend that the Virgin Islands Lottery:

2. Seek reimbursement of the $99,102 used by the
former Director for personal purposes; the $40,985 from the
missing bank deposit bag; and the $11,905 in collections
unaccounted for from a former Lottery employee.

3. Develop and implement, in accordance with Act
No. 5966, a standard policy for dealing with lottery dealers or
sales agents who deliver more than three unpaid returned checks
to the Lottery within a 12-month period

4. Develop and implement a policy to actively pursue
collection of accounts receivable for unpaid returned checks and
for instant lottery tickets delivered to business establishments and
not paid for.

5. Refrain from transferring funds from the operating
account of the instant lottery to the operating account of the
traditional lottery except for purposes of reimbursing the account
of the traditional lottery for validated operating expenses of the
instant lottery initially paid from the operating account of the
traditional lottery.

6. Develop and implement a policy that requires the
annual renewal of agent licenses and payment of licensing fees.

7. Submit to the former management firm of the instant
lottery the 1,165 unsold instant tickets valued at $97,000 and
request reimbursement in accordance with the terms and
conditions of the management contract.

8. Prepare the form "Daily Inventory of Ticket Sales" on
a daily basis in order to accurately record and document the daily
inventory of unsold lottery tickets.

9. Establish and implement, in accordance with the
Virgin Islands Code (32 V.I.C. 246(a)11(i)), a plan of action to
improve the profitability of the Lottery so that it will be
financially able to remit the $3.3 million owed the Government's
General Fund and continue to remit a portion of revenues.

10. Request, in accordance with the Virgin Islands Code
(32 V.I.C. 260a), that the Legislature designate a certified
public accountant or certified public accounting firm to audit the
annual financial statements of the Lottery.

11. Require, in accordance with the Virgin Islands Code
(32 V.I.C. 246(a)(12)(d), that the Lottery report monthly to the
Governor and the Legislature the total amounts of lottery
revenues (from the traditional and instant lotteries and fees
collected from dealers and agents for licenses), prize
disbursements, and other expenses of the Lottery.

12. Establish a time frame to begin preparation of a
certified monthly report to the Commissioner of Finance and the
Lottery Commission, in accordance with the Virgin Islands Code
(32 V.I.C. 247(i)), which provides a full and complete statement
of lottery revenues, prize disbursements, and other expenses.

13. Develop and implement procedures to maintain
master property records that include the specific information
detailed in the section "Other Lottery-Related Issues" on property
control records, perform physical inventories of equipment at
least once every 2 years, and reconcile the results of the
inventories to the property records.

14. Hire a computer specialist to assist the Lottery in
meeting its data processing needs and take action to finalize and
implement the proposed contract for Y2K upgrades to the
Lottery's computers.

15. Develop and implement new operating procedures to
ensure that the daily verification of collections and deposits also
includes a reconciliation to the value of lottery tickets sold and
lottery license fees collected each day and the recording of cash
shortages as accounts receivable due from the responsible cashier.
In addition, the branch office supervisors should review and
reconcile the daily collections and receipt documents of each
cashier.

16. Develop and implement a policy to ensure that
change funds are properly accounted for on a daily basis. In
addition, assurance should be provided that change funds are
included in the "Cash and Other Equivalents" account in the
Lottery's balance sheet.

GOVERNOR OF THE
VIRGIN ISLANDS AND
VIRGIN ISLANDS
LOTTERY
RESPONSES

The February 15, 2001 response (Appendix 3) to the draft report
from the Governor of the Virgin Islands, which transmitted a
February 8, 2001 response from the Virgin Islands Lottery,
concurred with the 16 recommendations and indicated that
corrective actions had been or were being taken.

OFFICE OF
INSPECTOR
GENERAL
REPLY

Based on the responses, we consider Recommendations 6, 8, and
16 resolved and implemented and Recommendations 1, 3, 4, 5, 9,
10, 11, 12, 14, and 15 resolved but not implemented. We also
requested additional information for Recommendations 2, 7, and
13 (see Appendix 4).

APPENDIX 1 - MONETARY IMPACT

FINDING AREAS Questioned UnrealizedFunds To Be Put
Costs* Revenues* To Better Use*
Disposition of Lottery Funds

Controls Over Unsold Lottery
Tickets

Distribution of Lottery
Revenues

Totals
$1,066,387 $144,839

111,380

$3,313,088

$1,066,387 $256,219 $3,313,088

__________
* Amounts represent local funds.
APPENDIX 2 - PRIOR AUDIT REPORTS

OFFICE OF
INSPECTOR
GENERAL
REPORTS
The August 1984 memorandum report "Review of Virgin Islands
Lottery Office" (No. V-TG-VIS-22-84) stated that internal
controls over Lottery operations were adequate. Specifically,
procedures were in place for the proper disposition of ticket sales
and prize payments, drawings were apparently random and there
was no evidence of drawings being influenced by outside sources,
advertising was used effectively, and operating expenses were
valid and properly recorded. The report included six
recommendations to improve the profitability of the Lottery.

VIRGIN ISLANDS
BUREAU OF AUDIT
AND CONTROL
REPORTS
The 1997 letter report "Limited Review of Employee Accounts
Receivable at the [Virgin Islands] Lottery" (No. AM-01-36-98)
stated that in 1996, the Lottery (1) overpaid prize winners by at
least $10,000 and underpaid prize winners by at least $8,000; (2)
allowed employee accounts receivable to increase to more than
$45,000 and failed to recoup losses from these employees; and (3)
did not enforce punitive sanctions against defaulting cashiers in
an attempt to either minimize or deter the incidence of transaction
inaccuracies and/or fraudulent activities. During our current
review, we found that as of December 31, 1999, employee
accounts receivable had increased to $144,788 but that the
methodology used by Lottery accountants to determine the
accounts receivable amounts may not have captured all cases of
cash shortages.

The 1993 letter report "Followup Review of Recommendations
Made in the Audit of the Internal Controls Over the Virgin
Islands Lottery System Operations" (No. AM-10-31-93) stated
that although the Lottery Commission concurred with the
findings and recommendations contained in the prior (1991)
report, only limited corrective actions had been taken. Of the
20 recommendations contained in the 1991 report,
11 recommendations were considered resolved and implemented,
8 recommendations were considered unresolved, and
1 recommendation was considered partially resolved and
implemented. Specifically, the followup review found that the
Lottery did not (1) segregate duties for the issuance, sale,
accountability, and inventory of tickets; (2) collect monies due
from dealers whose checks were returned unpaid by issuing
banks; (3) refrain from selling lottery tickets to individuals not
authorized to be dealers; (4) correct flaws in the data processing
program designed to control lottery ticket inventories; (5) verify
the authenticity of tickets submitted as winners of minor prizes;
(6) implement adequate security of cashier cages and storage of
lottery tickets; (7) prepare and submit reports required by the
Virgin Islands Code (32 V.I..C. Chapter 13); (8) develop and
implement adequate internal controls over the special paper used
to print lottery tickets; and (9) conduct performance reviews of
supervisors and employee staff members. During our current
review, we found that these internal control weaknesses had not
been corrected.

APPENDIX 3 - RESPONSES TO DRAFT REPORT
APPENDIX 3
Page 2 of 4
APPENDIX 3
Page 3 of 4
APPENDIX 3
Page 4 of 4

APPENDIX 4 - STATUS OF RECOMMENDATIONS

Finding/Recommendation
Reference

1, 3, 4, 5, 9, 10, 11, 12,
14, and 15

2 and 13

6, 8, and 16

Status

Resolved;
not
implemented.

Management
concurs;
additional
information
requested.

Implemented.

Management
concurs;
additional
information
requested.

Action Required

Provide this office supporting documentation
upon completion of the corrective actions.

Provide target dates for completing the proposed
corrective actions. Also, supporting
documentation should be provided upon
completion of the corrective actions.

No further action is required.

Provide documentation regarding the agreement
between the former Director and the former
management firm regarding the disposition of
unsold lottery tickets.